Is Medicare in Danger from Free Trade?

By Markets Fool.com


Image: TaxFix.co.uk, Flickr.

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Medicare is a vital piece Americans use to solve their retirement financial planning puzzle, and it also makes up a huge portion of the federal government's overall spending. In order to keep expenditures down, Medicare has worked hard to implement policies that negotiate better deals from medical professionals and drug manufacturers. Now negotiations on the seemingly unrelated Trans-Pacific Partnership,a huge free-trade pact between the U.S. and twelve other countries, have some analysts worried that passing the legislation could hamper Medicare's efforts to rein in costs by giving drugmakers an avenue to dispute arrangements to provide drugs below market value.

How the Trans-Pacific Partnership could affect Medicare
Earlier this week, WikiLeaks releasedthe TPP's"Healthcare Annex" on the transparency chapter's secret draft. The document, produced in December, includes the recognition of the need for high-quality health care and public health throughout the region, highlighting the tension between two often-conflicting policy goals. On one hand, the document acknowledges "the need to promote timely and affordable access to pharmaceutical products and medical devices." At the same time, it allows corporations more freedom in regards to controlling their intellectual property -- which would presumably increase the cost of these protected products for consumers.

To balance those concerns, the document purports to establish procedural guidelines to ensure fairness. Countries would have to complete reimbursement-cost lists within a certain time and disclose whatever rules are used to come up with their reimbursement guidelines. Public comment would be mandated, and a review process for challenging adverse decisions would allow for reconsideration of cost proposals from drug and medical device manufacturers.

The document specifically includes Medicare as one of the included national health care authorities covered, along with similar bodies in Australia, Japan, and Singapore, but health care systems in other countries are likely to be affected as well.

The worst-case scenario for Medicare
Opponents of the TPP provision point to the chilling effect of the proposed treaty language on efforts to cut costs. Federal and state government pay huge amounts for health care-related expenses, and in order to try to balance budgets, they've actively sought to get health care providers, drug manufacturers, and makers of medical equipment to bear a larger share of the overall burden by giving up some of what they see as unnecessarily high profit margins.. By requiring Medicare and similar bodies abroad to jump through certain hoops in order to produce acceptable reimbursement provisions, the TPP would potentially complicate the process of establishing reimbursement schedules. Moreover, the review process would open the door for pharmaceutical companies and medical-device makers to challenge those pricing schemes, drawing out negotiation processes and giving Medicare less leverage over private companies. The new proposals at least remove language from a previous draft that would have explicitly prevented national health care authorities from denying pharmaceutical companies the ability to charge prices based on free-market competition.

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The U.S. Trade Representative has said that Medicare as it's currently implemented wouldn't be subject to any adverse changes under the TPP, as his view is that Medicare already complies with the proposal in full. Yet future efforts to reduce costs further could be in jeopardy under the TPP provision, as any new methods of trying to control health care expenses would presumably be subject to the same rules, which could hamper reforms. For instance, Medicare's Part D prescription drug coverage currently does not allow Medicare to negotiate drug prices, and many believe that doing so could cut costs even further for Medicare participants. Yet even if current law were changed, the triggering of TPP procedures could complicate reform efforts.

The conundrum for the U.S.
The probably that Americans face is that even as the U.S. government bears the cost of higher health care expenses, many of the private corporations that make up the drugmakers and medical-device manufacturers that would benefit the most from limitations on medical-price reductions are in fact U.S. companies. As a result, from a macroeconomic sense, the U.S. government is fighting against its own economy by trying to limit profit margins for U.S. corporations. Critics of the TPP proposal point especially to prescription-drug programs in New Zealand and Australia, which have achieved considerable success in negotiating lower prices for medical devices and pharmaceuticals. Indeed, lower prices overseas are one of the arguments that many drugmakers use in defending charging higher costs in the U.S., saying that charging Americans more for their products is necessary in order for them to remain profitable and fund innovation to develop new life-saving treatments. In essence, the U.S. has subsidized the world, and so efforts to raise prices in foreign markets could arguably bring an end to the need for that subsidy and lead to lower prices domestically.

Obviously, within the political realm, allegations of lobbying-related pressure have many policy analysts frustrated with the TPP negotiations. Pfizer , Merck , and other major drugmakers spend millions on campaign contributions and lobbying efforts, and from an investor's standpoint, their efforts could boost profits and foster growth.

The furor over TPP and its potential impact on Medicare won't go away anytime soon; negotiations over the trade legislation have already taken years. Medicare participants and investors in health care stocks will want to keep a close eye on the trade negotiations to see who the eventual winners and losers will be.

The article Is Medicare in Danger from Free Trade? originally appeared on Fool.com.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.